25110
. (a) Notwithstanding Section 25101, a qualified taxpayer, as
defined in paragraph (2) of subdivision (b), that is subject to the
tax imposed under this part, may elect to determine its income
derived from or attributable to sources within this state pursuant to
a water's-edge election in accordance with the provisions of this
part, as modified by this article. A taxpayer, that makes a water'
s-edge election on or after January 1, 2006, shall take into account
that portion of its own income and apportionment factors and the
income and apportionment factors of its affiliated entities to the
extent provided below:
(1) The entire income and apportionment factors of any of the
following corporations:
(A) Domestic international sales corporations, as described in
Sections 991 to 994, inclusive, of the Internal Revenue Code and
foreign sales corporations as described in Sections 921 to 927,
inclusive, of the Internal Revenue Code.
(B) Any corporation (other than a bank), regardless of the place
where it is incorporated if the average of its property, payroll, and
sales factors within the United States is 20 percent or more.
(C) Corporations that are incorporated in the United States,
excluding corporations making an election pursuant to Sections 931 to
936, inclusive, of the Internal Revenue Code.
(D) Export trade corporations, as described in Sections 970 to
972, inclusive, of the Internal Revenue Code.
(2) (A) With respect to a corporation that is not described in
subparagraphs (A), (B), (C), and (D) of paragraph (1), as provided in
either one or both of the following clauses:
(i) The income and apportionment factors of that corporation to
the extent of its income derived from or attributable to sources
within the United States and its factors assignable to a location
within the United States in accordance with paragraph (3) of
subdivision (b). Income of that corporation derived from or
attributable to sources within the United States as determined by
federal income tax laws shall be limited to, and determined from, the
books of account maintained by the corporation with respect to its
activities conducted within the United States.
(ii) The income and apportionment factors of that corporation that
is a "controlled foreign corporation," as defined in Section 957 of
the Internal Revenue Code, to the extent determined by multiplying
the income and apportionment factors of that corporation without
application of this subparagraph by a fraction not to exceed one, the
numerator of which is the "Subpart F income" of that corporation for
that taxable year and the denominator of which is the "earnings and
profits" of that corporation for that taxable year.
(B) For purposes of this paragraph, both of the following apply:
(i) "Subpart F income" means "Subpart F income" as defined in
Section 952 of the Internal Revenue Code.
(ii) "Earnings and profits" means "earnings and profits" as
described in Section 964 of the Internal Revenue Code.
(3) The income and apportionment factors of the corporations
described in this subdivision shall be taken into account only to the
extent that they would have been taken into account had no election
under this section been made.
(4) The Franchise Tax Board shall prescribe regulations to
coordinate implementation of subparagraph (A) of paragraph (2) to
prevent multiple inclusion or exclusion of income and factors in
situations where the same item of income is described in both
clauses.
(b) For purposes of this article and Section 24411, all of the
following definitions apply:
(1) An "affiliated corporation" means a corporation that is a
member of a commonly controlled group as defined in Section 25105.
(2) A "qualified taxpayer" means a corporation that does both of
the following:
(A) Files with the state tax return, on which the water's-edge
election is made, a consent to the taking of depositions, at the time
and place most reasonably convenient to all parties, from key
domestic corporate individuals and to the acceptance of subpoenas
duces tecum requiring reasonable production of documents to the
Franchise Tax Board, as provided in Section 19504, by the State Board
of Equalization, as provided in Section 5005 of Title 18 of the
California Code of Regulations, or by the courts of this state, as
provided in Chapter 2 (commencing with Section 1985) of Title 3 of
Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title
4 of Part 4 of, the Code of Civil Procedure. The consent relates to
issues of jurisdiction and service and does not waive any defenses
that a taxpayer may otherwise have. The consent shall remain in
effect as long as the water's-edge election is in effect, and shall
be limited to providing that information necessary to review or
adjust income or deductions in a manner authorized by Section 482,
861, Subpart F of Part III of Subchapter N, or similar provisions, of
the Internal Revenue Code, together with the regulations adopted
pursuant to those provisions, and for the conduct of an investigation
with respect to any unitary business in which the taxpayer may be
involved.
(B) Agrees that, for purposes of this article, dividends received
by any corporation whose income and apportionment factors are taken
into account pursuant to subdivision (a) from either of the following
are functionally related dividends and shall be presumed to be
business income:
(i) A corporation of which more than 50 percent of the voting
stock is owned, directly or indirectly, by members of the unitary
group and which is engaged in the same general line of business.
(ii) Any corporation that is either a significant source of supply
for the unitary business or a significant purchaser of the output of
the unitary business, or that sells a significant part of its output
or obtains a significant part of its raw materials or input from the
unitary business. "Significant," as used in this subparagraph, means
an amount of 15 percent or more of either input or output.
All other dividends shall be classified as business or nonbusiness
income without regard to this subparagraph.
(3) The definitions and locations of property, payroll, and sales
shall be determined under the laws and regulations that set forth the
apportionment formulas used by the individual states to assign net
income subject to taxes on, or measured by, net income in that state.
If a state does not impose a tax on, or measured by, net income or
does not have laws or regulations with respect to the assignment of
property, payroll, and sales, the laws and regulations provided in
Article 2 (commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only if the
corporation making the sale may otherwise be subject to a tax on, or
measured by, net income under the Constitution or laws of the United
States, and shall not include sales made to a corporation whose
income and apportionment factors are taken into account pursuant to
subdivision (a) in determining the amount of income of the taxpayer
derived from or attributable to sources within this state.
(4) "The United States" means the 50 states of the United States
and the District of Columbia.
(c) All references in this part to income determined pursuant to
Section 25101 shall also mean income determined pursuant to this
section.